Those surveyed at Macquarie's London Metal Exchange (LME) base metals summit remain bearish, awaiting a macro recovery. Nickel has been the one metal to outperform in 2019, up 50% largely because of an Indonesian export ban. The most favoured long positions are in copper and nickel.

The preference for long copper positions centres on import-based demand growth in China, which is expected to remain strong amid insufficient mine supply. Around half of those surveyed anticipated that a slowdown in global demand growth would be a key factor in the price of copper falling below the US$6000/t level.

The most popular short positions are in zinc and aluminium although Macquarie notes nickel is also popular in this regard, a rare preferred long and short commodity. Even so, preferences for nickel are largely bullish. Including the very bullish participants, Macquarie calculates 57% of the survey envisages some upside to the current nickel price.

The preference for short positions in zinc is largely based on expectations for weaker demand growth while aluminium is swinging on a rapidly-changing production cost outlook. At present, with aluminium spot prices at US$1730/t, expectations are balanced.

Nickel

UBS agrees the nickel price is being supported by anxiety regarding supply. The ore export ban by Indonesia without any offset would lead to a temporary loss of -200,000tpa or around -8% of global supply.

The broker suggests the risk is mostly priced into nickel and nickel equities and maintains a forecast for a US$7.50/lb price. Indonesia's exports of nickel pig iron were up 36% in the year to the end of October and around 200,000tpa of smelting capacity is being commissioned over 2019.

The price risk lies to the upside from shifting policy and the consolidation of metal inventory, UBS suspects. Nickel inventory on the LME has halved amid a view that nickel supply will be tight in 2020.

This large decline in inventory could lift the supply anxiety and the broker observes stainless steel production in China has accelerated to record highs, although stainless steel inventory has also doubled. Outside of China stainless steel production is contracting.

LNG

Production of LNG in September was marginally lower, declining in Africa, Asia and Europe. JPMorgan notes a significant reduction in Asian exports, indicating gas could be withheld for the domestic market ahead of the northern winter.

Spot LNG prices in Singapore, up 30%, also increased sharply and the broker believes this is likely reflects rising European demand.

Yet, storage capacity is close to full and the overhang is likely to last into 2020 and potentially longer. Increasing gas demand from Europe has resulted from stronger gas-for-power requisitions along with a drop in French output because of a strike.

JPMorgan notes evidence of the long-awaited over-supply of LNG. Australian and US output grew, up 4% and 7% respectively in September. Australia's output would have been higher were it not for a partial shutdown at the North West Shelf.

China's Land Reforms

Citi asserts unlocking the land value in China should boost rural household wealth and consumption, benefiting the automotive, consumer electronics and other durables sectors as well as consumer staples and services. This will facilitate migration to urban areas and the development of affordable housing. Allowing rural construction land to enter the market also creates a new channel for urban land supply.

The country's planned land reforms could also open the door to corporate farming, as extended tenure and strengthened protection could make farmer rights to farmland more tradable. This should facilitate the start and operation of large-scale enterprises and cooperatives in agriculture.

Citi believes investor sentiment should improve amid continuing evidence the government is committed to a stable property sector as a key plank in its growth-driven reforms.

Steel consumption generally rises with income, although aggregate consumption rates are just part of the story. Consumption typically peaks when urbanisation rates reach around 70-75%. China's urbanisation rate is reported to be around 60% indicating it may be another 10-15 years before the country reaches the urbanisation threshold for steel consumption.

Importantly, history shows that urbanisation rates in other countries have remained high for more than 10 years once peak rates have been achieved. Hence, Citi suggests the conventional wisdom that China has reached a peak level in steel production and consumption could be premature.

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